OECD cuts global growth outlook as developing economies falter

PARIS (Reuters) - Advanced economies will increasingly have to drive the recovery as formerly fast-growing developing economies falter, the OECD said on Tuesday, as it downgraded its outlook for growth.

Trucks are seen parked around an automobile workshop overlooking the Lagos business district at the Orile-Iganmu in Lagos August 29, 2013. REUTERS/Akintunde Akinleye

The world economy is set to grow 3.4 percent this year before accelerating to 3.9 percent next year, the Paris-based Organisation for Economic Cooperation and Development said.

In its latest Economic Outlook, the OECD cut its estimate from 3.6 percent the last time it took the temperature of global growth, in November.

“We are still not out of the woods yet, because what we are seeing is better numbers, but the downside risks are still there,” OECD Secretary General Angel Gurria told Reuters Insider television. “Low growth is still there, very high unemployment numbers are still there.”

In addition, emerging-market economies such as China and Russia are becoming a drag on the global economy, though they should not derail the recovery that they had been driving until recently, Gurria said.

The OECD forecast that the U.S. economy, the world’s biggest, would grow 2.6 percent this year. That was down from its forecast of 2.9 percent in November, after bad weather caused a rough start to the year.

Long a laggard in the global economy, the euro area was expected to grow 1.2 percent this year, marginally better than the 1.0 percent the OECD had projected in November.

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The improved outlook put the euro zone on par with Japan, which was also expected to grow 1.2 percent this year. That was a downgrade from the previous forecast of 1.5 percent, after an increase in value-added tax.

Against that backdrop, the OECD encouraged the Bank of Japan not to let up on its unprecedented asset-purchase program, to help underpin what it called a virtuous cycle of rising prices, wages and corporate earnings.

However, it warned that Japan could not put off reining in its public finances, which the OECD said could cause a run-up in long-term interest rates.

Among major advanced economies, strong growth was forecast for Britain, where growth was estimated at 3.2 percent this year as household spending and business investment pick up. That was an upgrade from 2.4 percent in November.

Outside of the 34-nation OECD, China’s economy was seen growing 7.4 percent this year, down sharply from an earlier 8.2 percent forecast, as a building boom cools and lending conditions tighten.

Among the weakest emerging market, Russia’s economy was forecast eking out growth of only 0.5 percent. It will have to contend with quickly evaporating confidence and financial-market volatility caused by its stand-off with the West over Ukraine.

The OECD urged the European Central Bank to take action now to ward off the threat of deflation, a pernicious downward spiral in prices which undermines consumer and business confidence.

It called on the ECB to cut its main interest rate to zero at least until the end of 2015 and recommended it also push its deposit rate into negative territory. That would mean the ECB would effectively charge risk-shy banks to park spare cash with it overnight.

The OECD said even more radical action may be needed if euro zone inflation, which stood at 0.7 percent in April, still did not return to the ECB’s target of close to but less than 2 percent. Such measures could include purchases of financial assets, similar to those by the Federal Reserve in the U.S.

With the U.S. recovery more entrenched, the OECD recommended that the Federal Reserve wrap up its asset purchases this year and start raising interest rates next year.

Additional reporting by Axel Threfall; editing by Geert De Clercq, Larry King